This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the bottom of any article.

Dalbar: Advisors Should Sell Goals, Not Funds

Ordinary investors don’t get as excited as their advisors by mutual funds and annuities, yet we still find that advisors believe that these and other investment vehicles are their products.

But that is like saying that cloth is the product clothing-shoppers are seeking, says Boston-based financial services industry consulting firm Dalbar, in a new report on what it terms “purpose-based asset management.”

Clothing shoppers are seeking a certain look, and clothing designers therefore target their offerings differently to boomers than to their Gen Y grandchildren.

Yet perplexingly, “when it comes to financial services, this logic breaks down,” states the report, which places most of the blame not on product firms but on advisors and their broker-dealers who fail to distinguish between boomers planning for retirement and Gen Y members planning a wedding.

“Investor statements have come a long way in terms of communicating in a way that clients can understand the status of their investments,” Dalbar managing director Kathleen Whalen told ThinkAdvisor. “However, they fall short in a critical area — putting investment information into context so investors know what actions they must take to ensure they are on target to reach their goals.”

Indeed, investors are not seeking a hot fund but the achievement of a financial goal. “In financial services, achieving the goal is the product. The firm that truly helps investors achieve their financial goals is the firm that offers the market’s best product,” the report states.

And a key underutilized tool to help drive this process is the most basic tool in the toolkit — the investor statement, which Dalbar terms “the marquis investor communication.”

Currently, these quotidian documents are used as mere accounting reports which ignore the client’s true purpose for investing. But were that to change, investors would have a greater likelihood of achieving their goals and enjoy greater customer satisfaction.

Dalbar cites approvingly Wells Fargo Advisors’ “Envision” statements among isolated other examples, and recommends that broker-dealers modify their statements to help advisors shepherd clients and prospects through a process that clarifies goals and helps them keep those goals in focus.

While most advisors are familiar with a process that includes (Step 1) goal identification, (Step 2) plan development, (Step 3) monitoring of progress and (Step 4) periodic review, Dalbar argues that that process breaks down at Step 3, “when the client experiences a disconnect between their financial goals and the financial data they see on [a] monthly or quarterly basis.”

For example, an investor wanting to know if he is contributing enough to reach his goal does not get an answer to that question by looking at his statement’s account summary or transaction summary. He will see a total of contributions to the account, with no context as to how this fits in with the goal.

But why not report total contributions in conjunction with a benchmark defined in Step 1? Why not strengthen the investor’s ability to reach his goal by giving the option of assuming an ongoing rate of contribution and including that and any shortfall in the investment statement?

This sort of goal reporting, which tracks retirement income, fund sources and minimum and optimum funding goals, has become a best practice in the defined contribution space. There it is common to divide assets into risk and time-horizon-appropriate buckets for essential expenses (e.g. bills), longer-range goals (e.g. college expenses) and still longer-range and less crucial goals like vacation homes.

But in nonretirement sectors, most investor statements treat investors as if they had one goal, one risk tolerance and one suitable asset allocation strategy, and accordingly provide no data answering an investor’s key questions.

Again, a typical statement might display the investor’s rate of return, but the investor would have no clue as to whether that rate of return is sufficient to reach his specific goal. The statement might have an asset allocation summary, yet fail to indicate how that level of risk matches a specific goal.

Perhaps that is why investors seem to give up on financial services products, which fail to live up to their true goals. Dalbar cites average investor retention rate of 3.31 years for stock funds and 3.09 years for bond funds, but notes that more goal-oriented funds (for example, target-date funds) keep investors 35% longer than stock funds and 45% longer than bond funds.